Lehman Shares Get Boost From Analyst

Updated from 12:38 p.m. EDT

Lehman BrothersLEH rose as much as 4% on Friday after a Citigroup analyst downplayed liquidity concerns that have plagued the bank of late.

Citi analyst Prashant Bhatia said that shares of Lehman are attractive right now because the combination of a profitable fiscal first quarter in a tough environment, the actions taken by the Federal Reserve and Treasury to provide liquidity to investment banks, along with Lehman's management team track record of creating value and managing risk "all serve as excellent downside protection," he writes.

Bhatia upgraded Lehman shares to buy from hold. Shares of Lehman were recently up 53 cents, or 1.4%, to $39.24.

Cramer: Don't Buy Lehman

The positive sentiment toward Lehman comes one day after speculation kicked up in the market that the New York-based firm could go the way of its brokerage brethren Bear StearnsBSC. On Thursday, options traders increased their bearish bets on Lehman, which sent the stock sliding for the fourth day in a row. The stock dipped 8.9% Thursday.

A similar scenario preceded the collapse of Bear Stearns earlier this month, when rumors swirled about a lack of liquidity at the firm. While Bear Stearn's CEO Alan Schwartz even went on CNBC to reassure Wall Street that the company was indeed safe, the rumors became a self-fulfilling prophecy after investors began pulling money from the brokerage firm and counterparties refused to do business with it on fears of liquidity issues.

Two weeks ago, regulators forced Bear Stearns into a sale to JPMorgan ChaseJPM.

But Citi's Bhatia says that Lehman has "ample liquidity to run its business."

"In our view it's tough to have a liquidity-driven meltdown when you're being backed by government entities that have the ability to print money," Bhatia goes on to say in the note. Lehman currently has $34 billion in liquidity, access to more than $200 billion in liquidity from the Fed's primary dealer credit facility and the ability to tap the term auction facility, according to Bhatia.

"Actions speak louder than words and a post Bear Stearns era, the coordinated Fed [and] Treasury actions are designed to prevent a crisis of confidence leading to liquidity issues for any of the major investment banks," he writes. "The liquidity backstop buys the time necessary to restore confidence and quell fears that are not based on fundamentals."

In addition, Bhatia says that writedowns aside, Lehman had "its [second] best fixed income trading quarter ever."

Lehman's first-quarter profit fell 58% from a year earlier to $489 million, or 81 cents a share. Still Lehman and rival Goldman SachsGS seem to have fared better than others as the credit crunch lingers.

"We estimate that even in a stress-case scenario on the commercial real estate, residential mortgage, and leveraged loan portfolios, Lehman will generate positive earnings and grow book value per share this year," Bhatia writes.

Know What You Own: LEH operates in the financial services industry, and some of the other stocks in its field include Morgan StanleyMS, CitigroupC and Bank of America>BAC. These stocks were recently trading at ($44.90, -1.73%), ($21.03, -3.49%) and ($38.38, -0.67%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.